Home Value Highest Since ’07 as U.S. Houses Make Cash
By Kathleen M. Howley - Mar 26, 2013 7:43 AM
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Investors Lead Housing Recovery as Landlords
More American homeowners will
be able to use their properties as cash machines again after real estate equity
jumped last year by the most in 65 years.
A reviving real estate market added to gross domestic product
last year for the first time since 2005, according to the Bureau of Economic
Analysis in Washington. Photographer: Daniel Acker/Bloomberg
March 20 (Bloomberg) -- Douglas Yearley, chief executive
officer of Toll Brothers Inc., talks about the company's outlook and the impact
of U.S. budget cuts on home sales. Yearley speaks with Tom Keene and Sara Eisen
on Bloomberg Television's "Surveillance." Dan Clifton of Strategas Research
Partners also speaks.(Source: Bloomberg)
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An expanding group of homeowners
is able to get cash from their properties as banks show more willingness to make
home equity loans with the market’s recovery. Originations for the mortgages
should rise 10 percent to almost $83 billion this year, from about $75 billion
in 2012, said Shaun Richardson, a vice president at Icon Advisory Group, a
mortgage analytics firm in Greensboro, North
Carolina. About 6 percent of lenders eased equity-mortgage standards at the
end of 2012, the most in 18 months, according to the Fed.
“Lenders are starting to come
back into the marketplace,” said Greg
McBride, a senior financial analyst at Bankrate Inc. “We’re not going back
to the wild, Wild West we saw during the real estate boom, but we are going to
see more people spending their equity.”
Americans went on a spending spree in the five years before the 2006 peak of
the real estate market, tapping about $800 billion of their rising equity to
spend on everything from cars and televisions to debt consolidation and college
tuition. Declared Worthless
At the beginning of the
financial crisis in 2008, close to $1 trillion of the loans were outstanding at
U.S. banks and credit unions, an all-time high, according to the Fed. In the
housing crash that followed, banks wrote off, or declared worthless, about $251
billion of home equity loans, according to the Federal Deposit
Insurance Corp.
The year-old real estate
recovery is helping to ease defaults. The volume of equity loans 90 days or more
overdue dropped 25 percent in the fourth quarter to $3.2 billion from the prior
period, according to the FDIC. As a result, banks are beginning to view equity
lending as a potential source of income, rather than losses, said Stuart
Feldstein, president of SMR Research Corp., a consumer-lending research firm in
Hackettstown, New Jersey.
“This could be the year banks see the home-equity business return to black
ink, as long as defaults continue to decline,” Feldstein said. Credit Quality
Home-equity mortgages held by
banks probably will yield a 0.2 percent return on assets this year, which is the
after-tax income on outstanding loans, Feldstein said. Improvements in home
prices and credit quality over the next two years should put profit back
to the pre-bust level of 1 percent to 1.5 percent return on assets, he said.
JPMorgan Chase
& Co. (JPM), Bank of America
Corp. (BAC), Wells Fargo &
Co. (WFC) and Citigroup Inc. (C),
the top four U.S. banks by assets, hold $319.6 billion of the loans, about half
of the outstanding balance of $652.6 billion, according to the Federal Deposit
Insurance Corp. Bank of America has the most home-equity loans, at $102.6
billion.
In the last decade, home prices have fallen the most in
Michigan and risen the most in Washington, D.C. Visit Bloomberg's State-by-State
to find out more. Graphic: Bloomberg Visual Data
Helocs are adjustable loans tied to the prime rate, the interest charged by banks to their most creditworthy customers, with the addition of a margin pre-determined by the lender. The national average prime rate has been 3.25 percent since the end of 2008, as measured by Bloomberg.
Average Rates
The average rate for a Heloc
last week was 5.11 percent, down from 5.22 percent a year ago, according to
Bankrate.com, an interest-rate aggregator in North Palm
Beach, Florida. That puts the average margin at close to 2 percent.
Closed-end loans, sometimes called He-loans, are usually fixed-rate junior
mortgages or first liens used to refinances. The average U.S. rate for a
closed-end loan was 6.13 percent last week, according to Bankrate. A year ago,
the rate was 6.39 percent. Lenders usually require borrowers to retain at least 20 percent equity, meaning the junior mortgages added to the primary loan can’t exceed 80 percent of a home’s value, Bankrate’s McBride said.
“You won’t be able to borrow on
every last nickel of your equity,” McBride said. “After watching what happened
to home
prices during the housing downturn, lenders want a sufficient margin to
protect them.”
Value Evaporated
About $6.5 trillion of
residential real estate value evaporated after a wave of mortgage defaults sparked the 2008
financial crisis. The median U.S. home price hit bottom in 2012 after a 33
percent drop, as measured by the National Association of Realtors. In February,
the median price was up 12 percent from a year earlier, the trade group said
last week.
The S&P/Case-Shiller index
of property values in 20 cities increased 8.1 percent in January from the same
month in 2012 after rising 6.8 percent in the year ended in December, the group
said today in New
York. January’s gain was the most since June 2006, and exceeded the 7.9
percent median forecast by economists in a Bloomberg survey.
“Owners who have been sitting in their homes and watching their equity go up
will be more likely to borrow and to spend, and more likely to take risks like
looking for another house,” said Craig Focardi, senior research director at CEB
TowerGroup. “Having home equity is a financial cushion to the average consumer’s
personal balance sheet.” Reviving Market
A reviving real estate market
added to gross domestic product last year for the first time since 2005,
according to the Bureau of Economic Analysis in Washington.
The economy probably will grow at a 1.9 percent pace in 2013, the fourth year
after the end of the recession, according to the median forecast of 83
economists surveyed by Bloomberg.
Still, not everyone is spending.
The amount households have in bank
deposits, savings bonds, fixed-income mutual-funds and municipal securities
increased $500 billion last year, equaling the most since 2007, according to FTN
Financial, based on Fed data, while net household
debt increased $10 billion, the least since 2005.
“You might qualify for a home
equity loan, but still have concerns about the economy or job security,” said Icon Advisory’s
Richardson. “Or, you might be in that large group of people who need prices to
come back a lot more before they qualify.”
Fed Buying
Fed policy makers for four years
have driven down fixed home-loan rates by purchasing mortgage-backed bonds to
stimulate demand. Last week, the central bank said it would continue to buy
securities at a pace of $85 billion a month in their third round of so-called
quantitative easing.
At the end of 2012, the average rate for
a 30-year fixed primary mortgage fell to an all-time low of 3.3 percent,
according to home-loan financier Freddie Mac
in McLean, Virginia. Falling rates helped to boost home sales to 4.7 million
last year, a gain of 8.4 percent from 2011.
“When we see some more history of home-price stability and improving
employment data, there will be more people thinking about using their equity,”
said Focardi, of CEB TowerGroup. “Having equity gives a boost to confidence.”
To contact the reporter on this
story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.
To contact the editor
responsible for this story: Rob Urban at robprag@bloomberg.net.
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